02/15/17

WAS FRB CHAIR YELLEN’S TESTIMONY A NONEVENT?

By: Kent Engelke | Capitol Securities

If one uses fed fund futures, which are a gauge of market sentiment, FRB Chair Yellen’s testimony was almost a nonevent. Before she began testifying, the market was suggesting a 30% probability of a change in monetary policy in March. Now it is 34%.

Yellen said the Fed panel’s outlook for a “moderate pace” of growth is based on continued stimulative monetary policy and a pickup in global activity. She did not mention Trump administration proposals as a key element in the central bank’s forecast.

The Chair stated that consumer spending has continued to rise at a “healthy pace,” supported by gains in household income and wealth, favorable sentiment and low rates. The Fed chief said changes in fiscal and economic policies could affect the outlook, though she declined to speculate how, adding it is “too early to know” what policy changes will be put in place.

The longer dated Treasury market however had a different view of Yellen’s remarks. The 10-year increased in yield to around 2.50%. Last week, it was yielding about 2.32%. Will yields climb to December’s peak of 2.60%? The 30-year Treasury rose to 3.09% versus last week’s level of 2.92%. In December, the 30-year hit a 3.18% yield.

Did yields advance because of Yellen’s remarks suggesting a gradual increase in the overnight rate, which then may suggest the central bank could fall behind the proverbial inflationary curve?

Speaking of which, wholesale prices jumped in January by the most since September 2012, led by higher gasoline costs, thus suggesting inflation is beginning to stir. The 0.6% gain in the PPI followed a 0.2% advance in the prior month. Consensus called for a 0.3% rise.

Equites led by the financials, staged an advance on economic optimism.

Last night the foreign markets were up. London was up 0.49%, Paris up 0.50% and Frankfurt up 0.10%. China was down 0.15%, Japan up 1.03% and Hang Sang up 1.23%.

The Dow should open quietly lower assessing Yellen’s comments. The 10-year is off 3/32 to yield 2.49%.